Which of the following transaction will decrease the debt-equity ratio (2:1) of the company?
A) Issue of new shares for cash
B) Issue of new shares against purchase of fixed assets
C) Buy-back of its own shares by the company
D) Issue of debentures for cash
E) Issue of debentures against purchase of fixed assets
F) Repayment of long-term borrowings
Choose the correct answer from the options given below.
Answer & explanation
Correct answer: option 1
The correct answer is option 1- ABF.
Debt equity ratio = Debt/Equity
A) Issue of new shares for cash- Debt remains unchanged but shareholders fund increased with the cash amount due to which ratio will DECREASE.
B) Issue of new shares against purchase of fixed assets- Debt remains unchanged but shareholders fund increased with the amount of share capital issued due to which ratio will DECREASE.
C) Buy-back of its own shares by the company- Debts remains unchanged but shareholders funds is decreased due to which ratio will INCREASE.
D) Issue of debentures for cash- Debts increased but shareholders fund remains unchanged due to which ratio will INCREASE.
E) Issue of debentures against purchase of fixed assets- Debts increased but equity remains unchanged due to which ratio will INCREASE.
F) Repayment of long-term borrowings - Debts are decreased but shareholders fund remain unchanged due to which ratio will DECREASE.